Fuel Management

What if natural gas prices go up?

The boom in natural gas production in the U.S. has created an oversupply, leading to 10-year lows in natural gas prices. At the same time, some natural gas producers have cut back because of the low prices. If demand for natural gas increases, some wonder, won't prices increase, too?

Natural gas prices are currently running around $2.70 per million Btu, or MMBtu. (Natural gas is also measured in cubic feet. One cubic foot of natural gas produces approximately 1,000 Btu, so 1,000 cubic feet of gas is comparable to 1 MMBtu.)

For comparison, from 1990 through 2012, natural gas futures prices averaged $4.10 per MMBtu, reaching a record high of $15.35 in 2005 in the wake of hurricanes Katrina and Rita, which shut off natural gas supply flows along the Gulf Coast.

The Department of Energy (DOE) expects natural gas prices to rise. The DOE's Energy Information Administration projects that after 2017, natural gas prices will rise more rapidly than crude oil prices - but oil prices will still be at least three times higher than natural gas prices.

Natural-gas evangelist and energy magnate T. Boone Pickens has said natural gas prices need to be around $5 MMBtu to make economic sense for natural-gas producers.

So it's a pretty sure bet that natural gas commodity prices will rise. But natural gas experts say even a large price spike in the commodities price will not result in a correspondingly large spike at the pump.

"I think the laws of supply and demand definitely would create some movement in pricing, but I think it's important to understand the fundamental cost of the fuel in the retail environment," says Scott Perry, who heads up Ryder's alternative fuels program.

He explains that about 70% of the cost of a gallon of diesel is based on the petroleum itself. The rest of that price is made up of taxes, infrastructure and things of that nature. Because the price of oil is so volatile, affected day to day by such things as economic news from Europe or unrest in the Middle East, the price of diesel is volatile as well.

In contrast, only about 20-25% of the cost of a diesel gallon equivalent (DGE) of natural gas is driven by the price of the commodity, which is less volatile in the first place. The rest is tied to taxes, infrastructure, costs for the compression or liquefaction facilities, etc.

Basically, each $1 per MMBtu increase in natural gas prices equals a 14-15 cent per-DGE increase at the pump. So if the commodities price doubles from $3 to $6, the pump price would rise by less than 50 cents per DGE.

In addition, the natural gas fueling infrastructure is still a relatively young industry, points out Brian Powers, VP of operations for Clean Energy Fuels. Just as with the trucks, higher volumes should mean lower costs to build and maintain fueling facilities.

"Once the volumes start to materialize, once you start to get market share, the capital efficiency of the infrastructure will improve," he says. "So if in the future, the cost of natural gas goes up, my view is, once the volume goes up, you're going to more than offset that."

A recent bill proposed by California State Senator Nancy Skinner (D-Berkeley) lays out an even more aggressive plan for emissions reduction in the state and puts the transportation sector squarely in its crosshairs.

The price of regular gasoline continued to decline over the holidays and reached an average of $2.266 per gallon for the week ending Dec. 31, which was 5.5 cents lower that the prior week, according to the U.S. Energy Information Administration.